American Express Merchant Fee Accord Wins Court Approval

By Christie Smythe -
Feb 6, 2014

American Express Co. won preliminary
court approval of a settlement with U.S. merchants over
transaction fees that the retailers say complements a
multibillion-dollar accord with Visa Inc. (V) and MasterCard Inc. (MA)

U.S. District Judge Nicholas Garaufis in Brooklyn, New
York, made the ruling today and scheduled a Sept. 17 hearing on
final approval. The deal allows shops to encourage customers to
use debit cards, which are less costly for merchants, by adding
surcharges to credit card transactions.

The accord “unlocks the value” of the earlier settlement
with Visa and MasterCard, lawyers for businesses that accept
American Express cards said in a Dec. 20 court filing. While the
Visa and MasterCard accord allowed merchants to charge customers
more for using credit cards, American Express rules forbid those
practices unless all cards are treated equally, according to
lawyers for the plaintiffs.

“What we did is a compromise, a bargain, a realistic
settlement,” Gary B. Friedman, a lawyer for plaintiffs, said
after the hearing today. The plaintiffs are seeking to represent
a class of roughly 4 million merchants in the U.S. that accept
American Express cards.

Retailers have long accused the world’s three-largest
payment networks of charging unfair fees for processing payments
from customers. Those fees are often used to subsidize travel
and other rewards programs for cardholders, plaintiffs in the
American Express case said in a March 2011 complaint accusing
the New York-based company of antitrust violations.

U.S. Merchants

In their settlement with U.S. merchants over allegations of
fixing fees, Foster City, California-based Visa and Purchase,
New York-based MasterCard agreed to pay $5.7 billion in damages.
The American Express accord doesn’t provide for damages
payments.

Fifteen grocery and drug store chains including CVS
Caremark Corp. (CVS), Kroger Co. (KR) and Walgreen Co. (WAG) do not want to be a
part of the settlement and are seeking to continue their cases
against American Express. The retailers objected to approval of
the settlement, contending that provisions in the agreement
might prevent them from pursuing litigation.

A lawyer for the grocery and drug retailers, Richard Alan
Arnold, said in a Jan. 24 letter filed with the court that
American Express was trying to “gut” their cases, in which
they are seeking an order granting them broader freedom to use
surcharges or other mechanisms to encourage customers to use
cheaper payment methods.

“I think that’s something we can address down the road,”
Garaufis said during the hearing today. He said the agreement
meets the “low standard for preliminary approval.”

Antitrust Lawsuit

The U.S. Department of Justice is also moving forward with
a civil antitrust lawsuit against American Express over its fee
practices. Garaufis said that separate trials will be held for
the government’s case and for the cases brought by the group of
grocery and drug retailers. The government trial is scheduled to
begin June 16.

In its case, the Justice Department also seeks an order
barring American Express from imposing rules against surcharging
or other means of encouraging consumers to use other cards.

American Express’s settlement with merchants followed a
contentious court approval process for the Visa-MasterCard
accord in which dozens of large retailers, including Wal-Mart
Stores Inc. (WMT) and Amazon.com Inc. (AMZN), alleged the deal provided too
much leeway for the card firms to raise rates in the future.

The American Express settlement allows the card company to
walk away if certain objections are raised, if changes are made
to the deal, or if the Visa and MasterCard settlement is
modified after appeals. Wal-Mart, Amazon and other retailers
opposed to the Visa and MasterCard settlement have appealed
final approval, which was issued on Dec. 13.

Visa-MasterCard

American Express also appealed the Visa and MasterCard
settlement approval over its treatment as a merchant in that
case. American Express became part of the settlement because it
accepts some Visa and MasterCard payments.

After CVS, Kroger and the other drug and grocery retailers
raised concerns about the American Express settlement, the card
company filed a letter with the court Jan. 31 threatening to
back out if the objections were not overruled and the deal given
preliminary approval by Feb. 13.

Allowing further consideration of the retailers’ claims
would “destroy the essence of the settlement agreement and
result in its termination,” the card company’s lawyer, Philip C. Korologos, wrote.

The American Express settlement was announced in December
and would resolve two lawsuits filed on behalf of merchants.

The cases are American Express Anti-Steering Rules
Antitrust Litigation, 11-md-02221, U.S. District Court, Eastern
District of New York (Brooklyn) and Marcus Corp. v. American
Express Co. (AXP), 04-cv-05432, U.S. District Court, Southern District
of New York (Manhattan).

To contact the reporter on this story:
Christie Smythe in federal court in Brooklyn, New York, at
csmythe1@bloomberg.net